Jan. 2 (Bloomberg) -- Spending on U.S. construction projects unexpectedly rose in November as work on schools, power plants and factories helped overcome cutbacks in homebuilding.

The 0.1 percent increase followed a 0.4 percent drop the prior month that was smaller than previously reported, the Commerce Department said today in Washington.

The report showed private homebuilding fell by the most in more than five years, a sign the glut of unsold properties will delay a housing recovery until at least mid-2008. Commercial and government projects showed gains that help ease concern that economic growth stalled last quarter, economists said.

``The report was troubling because there were signs of a deepening retrenchment in outlays for single-family homes,'' said Omair Sharif, an economist at RBS Greenwich Capital in Greenwich, Connecticut. ``Builders will likely continue to scale back on groundbreaking activity in the coming months, making the outlook for spending on single-family homes abysmal.''

A separate report from the Institute for Supply Management today showed manufacturing in December unexpectedly shrank the most in almost five years, reinforcing speculation that the Federal Reserve will cut interest rates again to stave off a recession.

Forecasts

Total construction spending was forecast to drop 0.4 percent after an originally reported 0.8 percent decline in October, according to the median estimate of 47 economists in a Bloomberg News survey. Estimates ranged from a drop of 1 percent to an increase of 0.5 percent.

Private residential construction spending fell 2.5 percent, the most since January 2002, after a 2.3 percent decline the prior month, today's report showed. It marked the 21st consecutive drop in home construction.

Non-residential building, including public projects, rose 2.1 percent. It was up 18 percent from a year earlier, offsetting the 18 percent drop in residential building.

Public construction increased 2.5 percent, the most in almost a year. Private non-residential construction climbed 1.7 percent.

The economy grew at a 4.9 percent annual rate in the third quarter, the most in four years, the Commerce Department reported Dec. 20. An increase in commercial construction added 0.96 percentage point to growth, while declines in residential construction subtracted 1.08 percentage points, the report showed.

Slower Growth

Declines in home building are among reasons why the strength in economic growth will not be sustained, economists said. Consumer spending, which accounts for more than two-thirds of the economy, will also cool as Americans struggle with high fuel bills, lower home values, and tougher rules for borrowing.

Defaults on subprime loans and rising foreclosures are throwing more homes on the market, while falling prices are prompting buyers to wait for bargains, depressing demand and delaying a housing recovery.

Total sales of new and existing homes in November fell 0.8 percent to a 5.65 million annual pace, the lowest since comparable record keeping began in 1999, reports last month showed.

Some builders have sold off land as the housing slump deepens. M/I Homes Inc., a Columbus, Ohio-based developer, this week said it sold 22 percent of its land holdings for $82 million to reduce debt and is considering additional sales.

Non-residential construction may also slow as lenders make borrowing more difficult and demand softens, economists said.

Construction spending figures are based on expenditures over the life of a project, with about 75 percent of value accounted for in the first four months.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: January 2, 2008 11:17 EST